Annual Report 2013 - Mergers and Acquisitions

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Source: Sovereign Wealth Center.

Since the financial crisis sovereign wealth funds have enjoyed
the advantage of being intergenerational investors. Without
explicit liabilities, many of them have exploited their ability
to withstand market turbulence. In 2009 and 2010 they were able
to pick up distressed assets cheaply; more recently, they could
weather volatility in emerging markets to take advantage of
strong growth relative to the developed world.

But in early 2013 optimism started returning to global markets.
With interest rates remaining at record lows, investors hunted
for yield and began pouring money into equities, particularly
developing-world and dividend-paying stocks.

This influx of capital eroded sovereign wealth
funds’ competitive advantage, and they found
themselves outmuscled by market players prepared to pay higher
prices for assets. As a result, some of them became more
opportunistic, hoarding cash so they could buy quickly when
attractive direct-investment opportunities emerged.

More competition in the M&A markets resulted in a lukewarm
opening to sovereign wealth funds’ deal-making
year. Between January 1 and the end of March 2013, their
foreign direct investment, excluding real estate and
infrastructure, amounted to just $3.9 billion, the lowest
first-quarter total since 2007.

Sovereign Wealth Fund Direct Investments, Target
Industries, 2013

Source: Sovereign Wealth Center

Acquisitions in the commodities sector dominated sovereign
funds’ buying patterns in the first three months
of the year: four purchases worth a combined $2.7 billion
— almost two thirds of total non-property investment
value for the quarter. Historically, sovereign
funds’ interest in commodity producers largely has
been limited to oil and gas companies, but in 2013, as
hydrocarbon prices softened, they turned to a wider range of
commodities, particularly chemicals.

Singapore’s Temasek Holdings hedged its bets. In
March 2013 it capitalized on falling oil prices by purchasing 5
percent of Madrid-based oil and gas multinational Repsol for
€1 billion ($1.3 billion), which allowed the
Spanish company to bolster its finances and protect its credit
rating. A week later Temasek bought 4.6 percent of German
chemicals manufacturer Evonik Industries for
€600 million in advance of the company’s
initial public offering.

In the second quarter the most prominent non-real-estate deal
was a 102.5 billion-ruble ($3.3 billion) new share
offering by part-state-owned, St. Petersburg–based VTB
Bank to boost its tier-1 capital ratio. The Qatar Investment
Authority’s direct-investment arm, Qatar Holding;
the State Oil Fund of Azerbaijan; and Norges Bank Investment
Management (NBIM), which oversees Norway’s
Government Pension Fund Global, bought shares totaling almost
$1.7 billion. Temasek also was active in financial
services in the second quarter, buying an additional 1 percent
of Industrial and Commercial Bank of China for some
HK$4.5 billion (almost $600 million) and 10 percent
of global financial information and services company Markit
Group for an estimated $500 million.

Uncertainty about whether the U.S. Federal Reserve Board would
continue its bond-buying program, known as quantitative easing,
dominated the investment environment in the second half of
2013. The Fed’s decision to prolong the program
calmed investors’ nerves, but in September the
specter of a U.S. government shutdown left them cautious. In
Europe the German federal election and the right-wing Front
National’s assault on French President
François Hollande’s government provoked
further anxiety, while China’s slowing economic
growth also dampened investor optimism.

The upshot for sovereign wealth funds: In the third quarter of
2013, they closed just 16 deals outside the real estate and
infrastructure sectors, with a total value of $1.3 billion
— the lowest quarterly total we’ve
recorded for direct nonproperty investments since 2005, when
there were 12 fewer sovereign funds and the community was more
conservative.

Sovereign Wealth Fund Direct Investments, Target Regions,
2013

Source: Sovereign Wealth Center.

The largest sovereign fund deal in the third quarter of 2013
suggested that its architect, Temasek, remained bullish on
Chinese economic growth. The Singaporean fund exploited the
fact that it can absorb short-term volatility by braving the
skittish Hong Kong Stock Exchange to pick up a little more than
5 percent of China Pacific Insurance (Group) Co. (CPIC). The
investment meant that Temasek joined its peers the Abu Dhabi
Investment Authority, Singapore’s GIC and NBIM,
which had purchased stakes in CPIC at its 2012 IPO, as a
substantial investor in the company. Temasek’s
open-market purchases of CPIC stock in the second half of June
and early July cost the fund roughly HK$3.3 billion,
Sovereign Wealth Center estimates.

Sovereign fund deal flow remained slow during
October’s U.S. government shutdown, an event that
created uncertainty about the world’s largest
economy. But the deal-making situation improved starting with
the privatization of the Royal Mail, the U.K.’s
state postal service, on October 25. At the
company’s flotation on the London Stock Exchange,
GIC and the Kuwait Investment Authority bought substantial
stakes: 4.1 percent and 2.5 percent, respectively. Although
sovereign funds only closed $465 million worth of
non-real-estate deals in October, the next two months each saw
about $1 billion in transactions, with the largest total
value in financial services.

GIC made the biggest nonproperty deal of the final quarter,
acquiring 28.5 percent of London-based insurer Rothesay Life
from Goldman Sachs Group for some £255 million
($420 million) along with New York–based
alternative-asset management giant Blackstone Group and
Springfield, Massachusetts–based Massachusetts Mutual
Life Insurance Co.

Domestic Investments

In 2013, Sovereign Wealth Center recorded 26 sovereign wealth
fund domestic investments, totaling $5.4 billion. Temasek
made the most significant of them when it sold its 2012
investments in U.S. liquefied natural gas (LNG) and chose to
establish an LNG hub in Singapore to tap Asia’s
growing demand for clean energy. The fund set up two wholly
owned companies: 1 billion–Singapore dollar
($806 million) Pavilion Energy to invest in various parts
of the LNG value chain and S$1.25 billion Pavilion Gas to
procure, market and sell LNG in Asia.

Sovereign Wealth Fund Domestic Investments, Target
Industries, 2013

Source: Sovereign Wealth Center.

Australia’s Future Fund made another major
domestic investment, buying the Australian Infrastructure Fund
(AIX), which is mostly made up of airport assets, from
Melbourne-based Hastings Funds Management for A$2 billion
($2.1 billion). Local pension fund AustralianSuper
challenged the purchase — the Future
Fund’s largest domestic infrastructure deal
— alleging that the Future Fund had acted
duplicitously and prevented it from exercising its preemptive
shareholder rights over AIX’s stake in Perth
Airport.

In a similar vein, Malaysian sovereign wealth fund Khazanah
Nasional partnered with Toronto-based Sun Life Financial to
acquire 98 percent of CIMB Aviva Assurance and CIMB Aviva
Takaful, two insurance joint ventures between U.K. insurer
Aviva and CIMB Group Holdings, one of Malaysia’s
largest financial groups. Khazanah and Sun Life each paid
900 million Malaysian ringgit ($298 million) in the
transaction, which included exclusive rights to distribute
shari’a-compliant takaful products and other
insurance offerings through CIMB Bank’s Malaysian
network.

Beyond financial services, the Kuwait Investment Authority
(KIA) has established a 500 billion Kuwaiti dinar ($1.8
billion) joint venture, Tri International Consulting Group,
with international management consulting firm Oliver Wyman and
the emirates international aid agency the Kuwait Fund for Arab
Economic Development. Tri International’s goal is
to bring high-quality consulting expertise to Kuwait to improve
the competitiveness of the country’s
non-oil-sector enterprises. KIA owns a 60 percent interest in
the consulting company and contributed $1.1 billion in start-up
capital toward its launch.

QIA also set up a joint venture to transfer expertise to its
domestic economy. The fund established the $1 billion Nebras
Power Co. with state-owned Qatar Electricity & Water Co.
and Qatar Petroleum International, the foreign investment arm
of the country’s national oil company, taking a 20
percent share. Nebras Power will make international investments
in power generation, water desalination and treatment, heating
and cooling systems, and fuel provision to transfer knowledge
back to Qatar to help develop the emirate’s
infrastructure. In the same sector Saudi Arabia’s
Sanabil Investments allocated to Riyadh-based ACWA Power
International, which develops, owns and operates independent
water and power projects in Saudi Arabia and Morocco.

Alaska Permanent Fund Corp. (APFC) made the most unusual
domestic investment of 2013. In December, departing from its
usual relatively conservative strategy, APFC became a
cornerstone investor in a Seattle-based biotechnology start-up:
Juno Therapeutics. The fund allocated $50 million to Juno,
which is developing gene therapies that activate a
patient’s own immune system cells to attack
cancerous tumors. APFC invested alongside Chicago-based venture
capital firm ARCH Venture Partners; their total initial
allocation of $120 million was one of the
year’s largest first-round financings of life
sciences companies.

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